Reference no: EM132260493
Case - Zara’s Formula to Successful Fast Fashion: Innovative Supply Chain Management
The world’s preeminent pop singer takes the stage for the first leg of a month-long tour. Because she is known for her style, the fashion world takes notice of the patterned skirt she’s wearing. Within three weeks, a similar skirt is designed, manufactured, and available in retail stores for purchase. By the end of the tour, fans can be spotted at concerts wearing the same skirt the pop singer wore just a few weeks prior. This is fast fashion, and in this quick-moving industry, Zara is king.
How has Zara become so successful in the competitive retail clothing industry? The answer is in the second industry in which Zara operates that many are not aware of—apparel manufacturing. Zara, unlike many of its competitors, owns much of its supply chain. At the company’s headquarters in Arteixo, Spain, thought of as “the brain” of the organization by those who work there, Zara’s strategic decisions on what and how to produce its merchandise are made. Store managers place biweekly orders, and exactly two weeks later, inventory arrives at retail stores.
This just-in-time inventory technique affords Zara the opportunity to be nimble enough to respond to demand while minimizing risk.
Zara achieves an extremely fast turnover by producing every product in small quantities. New designs can arrive in store within 15-days, which means that Zara can respond to its customer demand by producing more of its popular products and disregarding less popular items. Zara’s Just in Time inventory procurement is underpinned by a highly developed forecasting system. Essentially, store managers collect sales data and current trends on a daily basis and send it back to head office where the information is analysed by its leading designers, who then update Zara’s clothing ranges.
If a new fashion trend is identified from a Paris runway or a pop icon, Zara can manufacture a small batch and distribute it to stores. If demand is high, a larger order can be placed, and manufacturing can be ramped up in a two-week time frame. If it doesn’t sell, little harm is done. In fact, Zara’s unsold items account for a mere 10% of its inventory in comparison to the industry average 17% to 20%.
To complement its JIT model, Zara did not follow in the footsteps of many of its rivals, who have based their main manufacturing bases in the far-east. Instead it took the bold step of centralising its textile factories and main logistics centers in Europe. Today, just over fifty per cent of Zara’s clothing are produced in Spain, Turkey and North Africa, which means Zara can send garments anywhere in the world within 48 hours.
When in-season adjustments are made to garments, such as a modification on a dress hemline or a new pattern on a blouse, the company’s headquarters relies on its in-house manufacturers to produce and deliver inventory back to the warehouse for shipment to stores within its infamous two-week timeframe.
The fast-fashion garments produced in this manner account for half of Zara’s inventory. The less trendy, more common wardrobe staples such as T-shirts, jeans, and sweaters account for the other half and are ordered in a similar manner to other traditional retailers: from Asian manufacturers approximately six months in advance. For retail competitors, these long-lead orders typically account for at least 80% of the merchandise they will offer that season. As a result, Zara’s in-house factories are freed up to produce the quick-turnaround items ordered by company headquarters.
Zara’s in-house manufacturing costs are significantly higher than those of Asia-based factories—wages for European workers were estimated at 8 euros an hour compared to 50 cents an hour abroad. Though the use of overnight shipping to reduce inventory idle time further increases in-house production expenses, the company understands these costs are a necessary part of its supply chain dynamic. The lack of excess inventory means there’s less need to discount merchandise. Zara receives full price on 85% of its items sold, while its industry competitors average 60% to 70%.
Zara also operates an extremely responsive logistics operation. For example, each of its 2,000 stores receives new items eight times a month. For this to happen, garments are picked, packed and ready to leave its distribution center in Arteixo, Spain, approximately eight-hours after a store manager places an order.
Knowing that inventory is limited and new items are stocked often, Zara customers frequent the company’s retail stores more often than customers of other chains, averaging about 17 visits per year over an average of five for Gap customers. As a result of high store traffic, Zara does not advertise, allowing these resources to be allocated to its supply chain management.
Zara’s unique core competencies have created a blueprint for other retailers to follow, such as H&M and Forever 21. Step into a Zara store and pick up something off the rack—there’s a good chance that garment went from idea to design to production to store to customer within the last two weeks. As for that pop star–inspired patterned skirt mentioned earlier? It’s already old news—Zara is working on its replacement.
Case Questions
1. Explain how utilizing both its in-house facilities and external manufacturers maximizes the efficiency of Zara’s supply chain. What are the advantages and disadvantages of each form of manufacturing?
2. What other companies utilize Zara’s business model? How much control do these companies have over their supply chain?
3. Which of Porter’s three competitive strategies does Zara utilize? Explain why.